Concept of Wages

1) Minimum Wage

a) Statutory Minimum Wage

• It is the wage determined according to the procedure prescribed by the relevant provisions of
the Minimum Wages Act, 1948.

• Once the rates of such wages are fixed, it is the obligation of the employer to pay them,
regardless of his ability to pay.

• Such wages are required to be fixed in certain employments where “sweated” labour is
prevalent, or where there is a great chance of exploitation of labour
 Concept of Wages

b) Bare or Basic Minimum Wage

• It is the wage, which is to be fixed in accordance with the awards and judicial pronouncements
of Industrial Tribunals, National Tribunals and Labour Courts. They are obligatory on the
employers.

• Minimum wage, and fair wage and living wage are the terms used by The Report of the
Committee on Fair Wages, set up by the Government in 1948.

• According to this Committee, the minimum wage should represent the lower limit of a fair
wage. The next higher level is the fair wage, and the highest level of the fair wage is the living
wage.
 THEORIES OF COMPENSATION

c) Minimum Wage

• It has been defined by the Committee as “the wage, which must provide not only for the bare
sustenance of life, but for the preservation of the efficiency of the worker.

• For this purpose, the minimum wage must provide for some measure of education, medical
requirements and amenities.”

• In other words, a minimum wage should provide for the sustenance of the worker’s family, for his
efficiency, for the education of his family, for their medical care and for some amenities.

• The question of determining the minimum wage is a very difficult one for more than one reason.

• Conditions vary from place to place, industry to industry and from worker to worker. The standard
of living cannot be determined accurately.
 Concept of Wages

Difference between the Statutory and Basic Wage

Basic Wage :is a wage which must be sufficient to cover the bare physical needs of a worker and
his family if an industry is unable to pay to its worker at east a bare minimum wage it has the
right to exist.

Statutory minimum wage: is however is the minimum wage which is prescribed by the statue
and it may be higher than the bare subsistence or minimum wage
 Concept of Wages

2) Living Wage: The committee defines Living Wage as

• Living Wage as “one which should enable the earner to provide for himself and his family not
only the bare essentials of food, clothing and shelter but a measure of frugal comfort, including
education for his children, protection against ill-health, requirements of essential social needs
and a measure of insurance against the more important misfortunes, including old age.”

• In other words, a living wage was to provide for a standard of living that would ensure good
health for the worker, and his family as well as a measure of decency, comfort education for his
children, and protection against misfortunes. This obviously implied a high level of living.
 Concept of Wages

2) Living Wage:

• Such a wage was so determined by keeping in view the national income, and the capacity to pay
of an industry.

• The goal of a living wage was to be achieved in three stages.

• In the first stage, the wage to be paid to the entire working class was to be established and
stabilized.

• In the second stage, fair wages were to be established in the community-cum-industry.

• In the third stage, the working class was to be paid the living wage
 Concept of Wages

2) Living Wage:

• The living wage may be somewhere between the lowest level of the minimum wage and the
highest limit of the living wage.

• Depending upon the bargaining power of labour, the capacity of the industry to pay, the level of
the national income, the general effect of the wage rise on neighboring industries, the
productivity of labour, the place of industry in the economy of the country, and the prevailing
rates of wages in the same or similar occupations in neighboring localities.
 Concept of Wages

3) Fair Wage:

• According to the Committee on Fair Wages, “it is the wage which is above the minimum wage but
below the living wage.” The lower limit of the fair wage is obviously the minimum wage; the upper
limit is set by the “capacity of the industry to pay.”

• The committee envisages that while the lower limit of the fair wage must obviously be the minimum
wage, the upper limit is equally set by what may broadly be called the capacity of the industry to pay.

• This will depend not only on the present economic position of the industry but on its future prospects.

• Fair wage is something above the minimum wage which may roughly be said to approximate to the
need based minimum in the sense of a wage which is adequate to cover the normal need of the average
employee regarded as a human being in a civilized society
 Concept of Wages

4) Need based Minimum Wage:

• The Indian Labour Conference, at its 15th session held in July 1957, suggested that minimum,
wage fixation should be need based, and should meet the minimum needs of an industrial
worker.

• For the calculation of the minimum wage, the Conference accepted the following norms and
recommended that they should guide all wage-fixing authorities, including the Minimum Wage
Committee, Wage-Boards, and adjudicators;

1) The standard working class family should be taken to consist of 3 consumption units for the
earner; the earnings of women, children and adolescents should be disregarded;
 Concept of Wages

2) The minimum food requirements should be calculated on the basis of the net intake of 2,700 calories, as
recommended by Dr. Akroyd, for an average Indian adult of moderate activity.

3) The clothing requirements should be estimated at a per capita consumption of 18 yards per annum,
which would mean, for an average worker’s family of four, a total of 72 yards;

4) In respect of housing, the norms should be the minimum rent charged by the Government in any area
for houses provided under the Subsidized Housing Scheme follow income groups; and

5) Fuel, lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total
minimum wage.

• The need based minimum wage is also a level of fair wage and represents a wage higher than the
minimum obtaining at present in many industries, though it is only in the lower reaches of the fair wage.
 Concept of Wages

5) Money and Real Wages

• Wages earned by employees are normally expressed in terms of money. There are two aspects
of wages. One is expressed by the term money wage while. the other by real wage.

• Money wages can be expressed by amount in terms of currency while the real wages refer to the
goods and services that an worker can buy with these wages.

• Changes in money wages can most appropriately be compared with changes in the average
price of a “ market basket “ of goods and services typically purchased by wage earners.

• Real wages are calculated by relating changes in money wages to changes in the consumer price
index.
 Theories of Wages

1) Subsistence theory

• This theory, also known as ‘Iron Law of Wages,” was propounded by David Ricardo (1772-1823).

• The theory was based on the assumption that if the workers were paid more than subsistence
wage, their numbers would increase as they would procreate more; and this would bring down the
rate of wages.

• In economics, the subsistence theory of wages states that wages in the long run will tend to the
minimum value needed to keep workers alive.

• The justification for the theory is that when wages are higher, more workers will be produced, and
when wages are lower, some workers will die, in each case bringing supply back to a subistence-
level equilibrium
 Theories of Wages

2) Wages fund Theory

• This theory was developed by Adam Smith (1723-1790).

• His basic assumption was that wages are paid out of a predetermined fund of wealth which
lay surplus with wealthy persons - as a result of savings.

• This fund could be utilized for employing laborers for work.

• If the fund was large, wages would be high; if it was small, wages would be reduced to the
subsistence level. The demand for labour and the wages that could be paid them were
determined by the size of the fund.
 Theories of Wages

3) The Surplus value theory of Wages

• This theory owes its development to Karl Marx (1818-1883).

• According to this theory, the labour was an article of commerce, which could be purchased
on payment of ‘subsistence. price.’

• The price of any product was determined by the labour time needed for producing it.

• The labourer was not paid in proportion to the time spent on work, but much less, and the
surplus went over, to be utilized for paying other expenses.
 Theories of Wages

4) Residual claimant Theory

• Francis A. Walker (1840-1897) propounded this theory. According to him, there were four
factors of production/ business activity, viz., land, labour, capital and entrepreneurship.

• Wages represent the amount of value created in the production, which remains after
payment has been made for all these factors of production.

• In other words, labour is the residual claimant.

 Theories of Wages

5) Marginal productivity Theory

• This theory was developed by Phillips Henry Wicksteed (England) and John Bates Clark
(USA).

• According to this theory, wages are based upon an entrepreneur’s estimate of the value that
will probably be produced by the last or marginal worker.

• In other words, it assumes that wages depend upon the demand for, and supply of, labour.

• Consequently, workers are paid what they are economically worth.

 Theories of Wages

5) Marginal productivity Theory

• The result is that the employer has a larger share in profit as has not to pay to the non-
marginal workers.

• As long as each additional worker contributes more to the total value than the cost in wages,
it pays the employer to continue hiring; where this becomes uneconomic, the employer may
resort to superior technology.
 Theories of Wages

6) The bargaining theory of wages

• John Davidson propounded this theory. Under this theory, wages are determined by the
relative bargaining power of workers or trade unions and of employers.

• When a trade union is involved, basic wages, fringe benefits, job differentials and individual
differences tend to be determined by the relative strength of the organization and the trade
union.
 Theories of Wages

7) Behavioural theories

• Many behavioral scientists - notably industrial psychologists and sociologists like Marsh and
Simon, Robert Dubin, Eliot Jacques have presented their views or wages and salaries, on the basis
of research studies and action programmes conducted by them.

• Briefly such theories are:

a) The Employee’s Acceptance of a Wage Level

• This type of thinking takes into consideration the factors, which may induce an employee to stay
on with a company.

• The size and prestige of the company, the power of the union, the wages and benefits that the
employee receives in proportion to the contribution made by him - all have their impact.
 Theories of Wages

7) Behavioural theories

b) The Internal Wage Structure

• Social norms, traditions, customs prevalent in the organization and psychological pressures
on the management, the prestige attached to certain jobs in terms of social status, the need to
maintain internal consistency in wages at the higher levels, the ratio of the maximum and
minimum wage differentials, and the norms of span of control, and demand for specialized
labour all affect the internal wage structure of an organization.
 Theories of Wages

7) Behavioural theories

c) Wage and Salaries and Motivators

• Money often is looked upon as means of fulfilling the most basic needs of man.

• Food, clothing, shelter, transportation, insurance, pension plans, education and other
physical maintenance and security factors are made available through the purchasing power
provided by monetary income - wages and salaries.

• Merit increases, bonuses based on performance, and other forms of monetary recognition for
achievement are genuine motivators.
 Case Study

Breaking The Bargaining Pattern

Gilson steel is a local fabricating and supply firm. Situated in open country, far from the large steel
making centers. The firm has been in business many years. About the third of employees have worked
in the organization for more than ten years. Top management would like to get away from the current
practice in which negotiations on wage matters and fringes follow the pattern. The firms president
feels that industry – wide bargaining tends to divorce employees from the firm . He thinks they feel
that their employer is a combination of U.S steel and bethlem steel instead of Gilson . he argues that
the local firm which has prospered , can do better by employees than is possible in national pattern .
he says that the local conditions should be taken into account . his basic objection to current practice ,
however , is his conviction that it tends to divorce its employees from local employer. The labour
relations manager has been urged to try negotiating terms at variance with the national pattern
 Questions for Case Study

Breaking The Bargaining Pattern

1.What theory and policy do you read into the presidents suggestion?

2. Suggest a promising innovative approach

 Case Study

Roshans Limited-Transport Facility The personnel Manager of Roshans Limited have

received an application for the introduction of company conveyance for employees staying in
town. Although Roshans Limited has provided living facilities to its employees about 60
percent of its 1000 employees still have to commute an average of 10 km to come to work.
The union and some of the employee s living on campus have supported the demand . Though
the management might favour such a move some sections of the work force are concerned that
the introduction of the company conveyance facility may cut down their wages .the company
under disguise of compensation allowance pays Rs.20/- per month for traveling to employees
staying more than 8 km away from the company premises.

Question- Provide the rationale for implementing / not implementing the policy.